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Disclaimer

I am neither a lawyer, accountant, nor a certified financial planner. If any ideas seem interesting to you here, please discuss them with your professionally licensed advisor before acting upon them. Otherwise, use them at your own risk.

Tuesday, September 12, 2006

to replace or repair an hvac at a rental property

$2Million just had an interesting post discussing the best approach to repairing the hvac at a rental property he owns.

The hvac was found damaged during inspection and the repair cost was estimate at $1500. Several months later after closing $2m sought to repair the hvac unit - to his dismay - he learned the parts cost hard risen to $2,500. Competitive bids came as low as $2,000 - still higher than he had budgeted.

Now the critical question: does he repair the unit (it was built in the early 1990s and has a 14-17 lifespan - nearly out of time) or does he replace it?

I vote to replace the unit for several reasons:

This is a rental property - I assume he plans to hold it for a while

Losing hvac or a/c while renting a property is key to disaster - you have to act very quickly, time pressure eliminates your advantage in comparison shopping and your at the mercy of the repair staff who may/may not be there when you need them

In some communities rental units without hvac can be declared uninhabitable

Who knows what other problems are waiting to unleash themselves upon him.

If the property is cashflowing positive, I recommend $2m finances the hvac replacement and use the cash flow from the propert to pay the new unit expense. Depending upon how he works the accounting it can be considered a repair or an improvement - either way he'll garner a tax benefit (the first immediate, the second when he sells). By financing the debt he also maintains his cash reserves other additional unforseen issues with the property.

In retrospect, it would have been nice if he had a new home warrantee, though I doubt the hvac problem would have been covered, unless he had negotatiated with the seller to have it repaired prior to sale. Traditionally, I've never bought new home warrantees, but apparently they are not to expensive and they could help with mechanical costs.

I had to replace an hvac system several years ago shortly after buying a new house. I was dismayed at the additional $3,000 outlay.

1 comment:

Good insight - I didn't clarify on my post - the property is my primary residence at the moment (not a rental property), but I probably will convert it to a rental property within the next 1-2 yrs.

Still you point on the tax is valid - if I replace the unit - I can add to my cost basis and depricate, if I repair I will get no future tax benefit.

I sort of have a slanted opinion on this based on the HVAC system at my 1st property. Almost identifcal problem - needed a new heat exchanger when I bought it. I followed your suggestion for this one and opted to replace the whole unit - it was $2,600 for the furnace.

However, things started to go down hill. I started having AC problems and then had to replace the AC unit - $1,500. Then the furnace problems came back and after spending more oney come to find out the heat exhanger in the brand new system was bad.

Yes the system was under warranty but the warranty covered parts and it cost almost $600 in labor to put in the replacement heat exchanger.

Needless to say HVAC expenses scare me. That all new system (almost twice over :-) is running great now, but it nearly got out of hand. Im reluctant to spend more than I need to because I guess I am worried the same thing could happen again.